Dive Brief:
- Investment in digital health and healthcare IT companies remained muted in the second quarter, as the health technology sector continues to cool off after a funding boom during the COVID-19 pandemic, according to two new PitchBook reports.
- Healthcare IT firms, which offer enterprise software for payers and providers, scooped up $1 billion in venture capital investment, a dip from the first quarter but above the sector’s low point in the fourth quarter of 2022. Private equity deals dropped from 29 in the first quarter to 15 in the second quarter as buyers held out for better valuations, according to the research firm’s healthcare IT report.
- Digital health, which includes companies that offer consumer-focused tools and virtual care, raised only $900 million in VC funding during the period, a new low compared with $1.2 billion in the first quarter and $1.7 billion during the second quarter in 2022, according to PitchBook’s digital health analysis.
Dive Insight:
Digital health funding has slipped since it reached new heights during the pandemic, when U.S.-based companies in the space raised more than $29 billion, according to one tracker.
Debt financing and rounds with undisclosed valuations are on the rise among digital health firms, signaling that funding has become more difficult to find, according to PitchBook. For example, behavioral health company Headspace announced a $105 million debt round earlier this summer.
“While we anticipate eventually writing once again about valuation jumps and new unicorns, the current reality is that digital health funding remains in a down trend, and we don’t expect a material uptick in funding for at least the next several quarters,” the digital health report’s authors wrote.
The year is on track to have at least 25% fewer venture capital deals compared with 2022, PitchBook said.
Bright spots for digital health investment include teletherapy and behavioral health companies, which raised almost $378 million in the second quarter, and care coordination and navigation firms, which raised almost $479 million.
On the healthcare IT side, more venture capital cash entered the sector in the second quarter compared with late 2022 as health systems began to recover financially after the COVID-19 pandemic. Hospitals faced significant financial challenges last year as persistent high labor costs hammered their bottom lines.
But younger companies are making up a much smaller share of deals. The share of angel, seed and early-stage VC deals for healthcare IT firms so far this year fell to 26.2% compared with an average of 48.9% between 2020 and 2022.
“In an environment that prizes the path to profitability at increasingly early stages, it remains difficult for investors to buy into commercialization plans for young companies facing long health system and payer sell cycles and a contracting self-funded employer market,” the healthcare IT report noted.
Companies offering generative artificial intelligence technology, a hot topic among healthcare providers overwhelmed by administrative work, bucked the trend. The report found four of the top 10 early-stage VC deals were for generative AI companies. Collectively, generative AI firms raised $250 million during the quarter.
PE deal-making hit a wall in the second quarter, closing only 15 deals in the second quarter. High interest rates, limited debt availability and gaps between buyers and sellers on valuations are slowing deals in the space, similar to the trend seen among healthcare services.
But a more stable macroeconomic environment could boost PE deals in the second half of the year, the report author’s said.
